Saver protection scheme planned

Banks should pay "many billions" of pounds into a depositor protection fund planned under new legislation, Bank of England Governor Mervyn King told MPs.

Lenders should also contribute according to how risky they are and be obliged to put up money before a financial disaster like the Northern Rock collapse strikes, Mr King said.

He was speaking to members of the House of Commons Treasury Select Committee on the issue of banking reform.

A series of new measures have been proposed by the government in the wake of the Northern Rock debacle, including increased protection for savers and a special resolution regime for failing banks which would allow regulators to take control of them more easily.

Asked how much banks should contribute to the depositor protection fund, Mr King said: "Something that would amount to a non-negligible contribution. Over 10 years you would have built up a fund of many billions."

He added: "The bank's view is that an element of pre-funding will be a desirable part of the scheme. If you wait until there is a problem, that's a rather bad time to ask banks to put up money."

The governor said that he was in favour of a "risk based premium" for banks taking part in the protection scheme.

Institutions "should pay a contribution which reflects the riskiness of the bank", he said.

Mr King said a 100% guarantee for up to £50,000 of savers' funds was "very sensible".

He added that measures such as the depositor protection scheme and other increased powers for the bank and the financial services authority under the special resolution regime would have made an "enormous difference" had they been in place at the time Northern Rock ran into liquidity problems last summer.